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Introduction

Is it simply me, or does time fly? We’re already Wiskinny the second half of the final month of 2022. This suggests It is time to look inTo twenty23. Definitely one of many primeics we talked about most in 2022 is agriculture. What started with a demand-pushed bullish thesis in 2020 shortly Turned a purple-scorching agriculture bull market with extreme current factors. On This textual content material, I am going to Supply you my outlook for The subsequent yr. We’ll cowl tight commodity current, fertilizer prices, farm financials, And a quantity of completely different shares that I both personal or have on my watchlist.

So far, it appears Just like the surge in crop prices Isn’t transitory. Demand Is ppurpleicted To primarytain extreme, wright hereas current is unMore probably to resure. High fertilizer prices, developing export demand, and droughts are simply three camakes use of Which will current us with extra meals inflation going forward. Furtherextra, as farmers are getting squeezed by greater prices, It is important To evaluate how this might influence the state of affairs.

Now, with out further ado, let me information You thru my outlook, my ideas, and my funding picks.

What to anticipate In 2023

Razor-skinny current/demand margins

I think about that I’ve talked about it A pair of events, Neverthemuch less It is exhausting To discover A spot To start out when discussing agriculture. Agriculture Might be A few of the complicated macro themes on the planet. It’s influenceed by endmuch less exactityors like climate, power prices, inhabitants progress, financial progress, power demand, wrestles, current chains, And a lot extra.

Primarily, buyers Want to handle all Of these exactityors when buying and promoting agriculture commodities or corporations working in agriculture industries.

Why? As a Outcome of the distinction guessween agriculture demand And current is razor-skinny. Any disruptions To current (demand Is usually Much extra ppurpleictable As a Outcome of it develops with The worldwide inhabitants) are More probably to set off steep spikes in key commodities.

For event, the chart under reveals The worth of CBOT corn (black). Corn – like many completely different agriculture commodities – tends To primarytain differ sure. Agriculture commodities, More typically than not, commerce with A very slender margin above manufacturing prices.

Therefore, when enter prices all of a sudden Begin to rise, We typically witness surges in crop prices as properly. That is why I added The worth of Brent oil to the chart under (odiffer).

TradingView (CBOT Corn, ICE Brent)

It furtherly Want to be said that crops like soybeans and corn are needed for ethanol and renewable diesel. Roughly 40% of the corn crop and 25% of the soybean crop are used for biofuels.

Add to this that corn and soybeans account for An complete of 70% of planted acres in America. Therefore, it Is not any shock that power markets have Find your self to be so important.

The worst half is That Every one of this occurs in a state of affairs wright here the distinction guessween current and demand is already terribly tight. Wanting On the chart under, we see that worldwide wheat demand has been greater than current For 3 straight yrs. For constructive, that’s horrible!

CME Group

As I wrote in a current article (and completely differents earlier than that), the OECD estimates that agriculture current progress Shall be 1.1% per yr for the foreseeable future (2030 outlook).

The worst half is that demand Is ppurpleicted to develop by 1.4% per yr As a Outcome of Of worldwide inhabitants progress, which offsets any declines Launched on by way of life modifications (like people turning into vegetarians or vegans).

Before we dive into alternatives that come up from these developments, tright here’s extra that Want to be talked about.

Earlier this month, I wrote an article on fertilizer corporations. It was (and nonethemuch less is) one of The most properly appreciated and most important agriculture primeics of 2022. Everyone talked about it after Russian forces set foot in Ukraine.

Fertilizers are important beset off They Appear to be A critical driver of crop progress. Using corn For event, the US crops roughly 90 million acres of corn. That quantity has been Sort of unchanged since 1926. Neverthemuch less, all by way of This period, The worldwide inhabitants grew by 4x.

This should imply that farmers are extra environment nice. Proper?

That is true. In 1929, farmers produced roughly 20 bushels of corn per acre. Then, after the wrestle, that quantity rose to 40 (which is already spectacular). Quick forward 80 yrs, and we’re Dealing with a yield Of Shut toly 180 bushels per acre.

Purdue College

Earlier this yr, Goehring & Rozencwajg wrote a terrific paper on hazards in agriculture. They extrememilded difficulties in mannequining anticipated crop yields Due To impact of so many exactityors. In any case, drivers Of greater yields embrace fertilizers, GMO crops (greater seeds And huger crops), and precision farming methods.

Neverthemuch less, they have been In a place To make the most of machine studying to evaluation the influence of fertilizers (in this case, nitrogen).

Their discoverings are noskinnyg In need of spectacular:

[…] we estimate that as a lot as 40% of coarse grain yield enhance since 1961 Might be attributed To enhanced nitrogen software.

Furtherextra:

We think about that a 5% purpleuction in nitrogen software could Finish in An instantaneous 1 to 2% purpleuction in worldwide grain current. Given The prevailing tightness, such a drop Could have an outmeasurementd influence on current-demand stcapabilitys going into the 2022-2023 planting season.

Now, You understand why the stakes are so extreme in agriculture When it Includes defending current progress In any respect prices.

Anticipate Crop Prices To Stay Strong – The Bull Case Is not over

CoFinancial institution, is one of America’s hugest coopperiodtive banks, serving very important industries throughout rural America. This embraces loans, leases, export financing, and everyskinnyg associated to agriculture.

As An factor of their service, they current a full-yr 2023 outlook cowling everyskinnyg influenceing agriculture. And, as we already talked about, that’s a lot.

Definitely one of many factors The agency raised is the presconstructive on farm margins. I get that a lot from talking to farmers, studying reviews, and watching farmer vlogs on YouTube like this one, which defined the influence rising fertilizer prices have on farmers.

Youtube (aTrippyFarmer) – Explaining The Impact Of High Pure Gasoline Prices On Fertilizer Prices

So far, farmers have carried out pretty properly as farm incomess have accelperiodted. But, That would now come to a halt.

CoFinancial institution think abouts that A combination of skyrocketing manufacturing prices, steeply greater Costs of curiosity, an elevated greenagain, and weakening home and export demand Launched on by declining exact incomes amid spiraling inflation Shall be exactityors To watch.

Farm income has been on a tear. In 2019, farm income was $80 billion. That quantity has virtually doubled Due to greater crop prices, extreme export demand, extreme power prices, And tons of of completely different intperiodssociated exactityors. Notice that not even the preliminary surge (explosion) in fertilizer prices was able to primarytain income from rising in 2022.

CoFinancial institution

Tright here is a extreme hazard that farm income Goes To primarytain Shut to $140 billion as We’re at Some extent wright here it is extra sturdy for incomes to offset working funds.

Add to this that crop yields might come beneath presconstructive. Not solely from decrease fertilizer software (To reduce prices) However in addition from droughts. The Nationwide Weather Service’s Local climate Ppurpleiction Center estimates tright here’s a 50% probcapability of ancompletely different dry rising season As a Outcome of Of L. a. Nina climate circumstances.

For event, Wiskinny the final harvest, climate circumstances set offed Brazil’s soybean crop To return in 10% smaller. Now, add to this thOn the nation is reducing fertilizer software, and we get a recipe for very tight currents in 2023.

Bloomberg

CoFinancial institution – like many completely different market halficipants – May even be focused on China. Geopolitical tensions like an invasion of Taiwan would have A critical influence on crop prices as It’d disrupt demand And current chains.

Neverthemuch less, I might rule out any Of these tensions Wiskinny the yrs forward. If anyskinnyg, the reopening of the Chinese language financial system will spur demand for crops and meats (each are associated), As properly as to power commodities (collectively with corn).

In mild Of these developments, tright here’s a silver lining (for farmers). Global grain and oilseed currents are terribly tight. Going inTo twenty23, the world coarse grains inventory/use ratio has been in a dpersonaltrend for six yrs. While the ratio Continues to be elevated, it Want to be said that China’s huge agriculture inventories are a set off why this ratio appears greater than it is. In any case, China’s currents are strategic. Tright here’s zero probcapability They will flood The worldwide market To alleby way ofte tight current.

CME Group

The latest WASDE report conagencys my worries. Below, we see An abstract of the three key crops that I can’t sprime talking about: corn, soybeans, and wheat. We see that complete use is declining in all three of them. That is not good for farmers. Lower export demand is An monumental driver of this decline.

While I expect that To end up to be a tailwind Wiskinny the yrs forward, tright here’s someskinnyg else Occurring. Production is dpersonal. Regardmuch less of decrease demand, ending shares nonethemuch less fell in all three circumstances. The inventory-to-use ratio of all crops declined as yields and planted spaces declined. That is very bullish as I do not expect manufacturing to resure in a implyingful method. Meanwright hereas, demand Is ppurpleicted To primarytain strong (and enhance further, Do you have to ask me).

College of Illinois

That is whOn the visualization of current appears like. It’s exactly worrying given the demand outlook.

CoFinancial institution

With all of this in thoughts, this is what CoFinancial institution wrote:

The mixed worldwide ending shares of corn, wheat, and soybeans are forecast To say no for the fifth straight yr in 2022/2023. For the 2023 harvest, the futures market is presently offering what would traditionally be thought-about very strong prices. However when accounting for All of the road merchandise manufacturing value will enhance, revenuecapability pencils out near breakeven, at biggest.

What Does The Chicago Fed Assume?

In mild Of these feedagain and discussions, I discoated An excellent report revealed by the Chicago Fed. The Chicago Fed opperiodtes Wiskinny the seventh district, which cowls Higher than 40% of Usa corn, soybean, and hog manufacturing. For constructive, that’s An monumental deal.

Fedperiodl Reserve Financial institution of Chicago

Not solely that but A lot of Chicago Fed feedagain Might be mixed with completely different skinnygs I needed to share with you anymethod.

For event, this is whOn the bank said about farmers’ margins and farmland worths:

It is a interval wright here farm manufacturing Is strong. The enter prices have been up pretty dramatically as properly. So as that’s Making a Little bit of presconstructive on the margins for agricultural producers. And It is a interval wright here the momentum of will enhance in farmland worths has been primarytained, Even when tright here’s a smild trailing off from the very fast rates of enhance that We have seen Prior to now yr.

The chart under reveals Iowa farmland prices. Nominal worths are up 17%. Adsimplyed for inflation, prices are up 8.6%. This occurs despite quickly rising Costs of curiosity. It reveals two skinnygs. First, farmers Ought to pay A pretty penny to get entry to new farmland. Second, buyers detime periodinedly need farmland. We will debate why that is, but I am constructive the market is awrestlee of how detime periodined the world is for agriculture current – Even when Which implys borrowing at greater prices To buy land.

College of Illinois

Furtherextra, farmers are doing properly so far. As of 3Q22, we see thOn The regular of cpurpleit Wiskinny the enterprise has gone up!

Fedperiodl Reserve Financial institution of Kansas Metropolis

Furtherextra, the Chicago Fed sees robust export demand despite the strong greenagain.

Both exactityors, In exactity, are having fun with A process, Neverthemuch less it Looks like completely different, hugeger exactityors are overwhelming them. In the previous yr, anymethod, we had a doc for the fiscal yr in ag exports from America. So the greenagain has not pushed dpersonal exports. They mightbe Might have been even greater if the greenagain Weren’t so strong, but certainly tright here’s demand for our merchandise. And An factor of that in all probcapability comes again to The fact that Ukraine had been conspracticeed in how a lot they have been able to export.

I think about these feedagain are important as I Do not see A critical demand decline. Tright here’s not a method export demand weakens till A strong recession Finally ends up crushing power demand And completely different people’s capability to afford primary meals merchandises (for event, reducing meat consumption beset off Of private funds).

The beneathside Line

I am An monumental think aboutr in a continuation of the agriculture bull case. Neverthemuch less, it Will not be a straight-line uptrend for crops, fertilizers, and The corporations working Wiskinny the enterprise.

I think about that we’re in A mannequin new period for commodities. This embraces power, metals, and agricultural commodities. I do not skinnyk thOn the sudden upswing after 2020 will end in a sudden decline. I expect above-common prices on An prolonged-time period basis as current progress Is simply unable To fulfill demand.

Weather, decrease fertilizer software rates, geopolitical tensions, and extreme working prices will primarytain current progress terribly subdued. Demand, Neverthemuch less, will (Higher than probably) reprimary strong.

TradingView (CBOT Wheat)

The primary wild card This is A strong recession. A recession could briefly scale again demand As a Outcome of of decrease power demand and decrease consumption of Costlier meals merchandises like meats (extremely crop-intensive).

That said, I reprimary bullish on agriculture shares And might use weak spot to increase my places.

Definitely one of the biggest Stocks To Watch/Trade/Pay money for

Agriculture is risky And exactly numerous. Agriculture embraces (amongst completely differents):

• Equipment corporations producing and promoting gear
• Fertilizer producers
• Pesticides and associated crop safety producers
• Trade & processing agencys
• Supply chain assist (transportation)
• Financing (banks)

Therefore, I am going to stroll You thru my watchlist, Which might Help you to in your private funding selections. I will use hyperlinks to My very personal and completely different Looking for Alpha articles To current some extra information In your evaluation. In any case, diving into Each inventory would make This textual content material method too prolonged.

To start with, I personal two prolonged-time period dividend shares That are based mostly on my objective to genperiodte prolonged-time period wealth in agriculture.

My hugest funding is in Deere & Company (DE). In November, I coated The agency in good element, explaining why I think about the inventory has room to run to $600.

FINVIZ

The agency is blowing it out of the park As a Outcome of it advantages from quickly rising farm income (see the farm income chart I Utilized in This textual content material). It permited farmers to finally substitute previous gear after A few yrs of subdued crop prices.

Furtherextra, The agency advantages from its subsequent-gen gear, which makes use of automation and associated precision devices To enhance yields when it issues most.

It furtherly assists that Deere has super pricing power. Particularly in an environment of peaking working funds, The agency is in An excellent place To take care of extreme incomess progress. Even if farm income slows, The agency Shall revenue from a substitutement cycle For A pair of yrs To return.

Deere & Company

I think about that Deere Is a fantastic funding every time corrections happen. I can think about that recession fears will push the inventory dpersonal 10-20% Finally in 2023 (that’s Commonplace for Deere As a Outcome of it occurred in 2022 as properly).

Ancompletely different inventory By which space is the AGCO Company (AGCO). It is the a lot smaller peer of Deere. Neverthemuch less, it personals spectacular and fast-rising fashions like Fendt, which are gaining market share in key markets.

FINVIZ

I might apply The identical right here. Buy on weak spot. If we get fortunate, We’d Be succesful of buy some at $100 earlier than the prolonged-time period uptrend takes this inventory to $200.

The second inventory I personal in my dividend progress portfolio is Canadian Pacific (CP), a Canadian railmethod with large agriculture expoconstructive.

FINVIZ

In 2022, virtually A third of incomes acquired here from agriculture shipments. Enhancing yields in Canada and extreme export demand are primary drivers of revenuecapability.

Based on The agency:

We noticed this yr’s grain harvest exactly Begin to begWiskinny the final couple of weeks of the quarter, and volumes have shortly now ramped up as we transfer into This fall. The Latest expectation for the Canadian grain crop measurement is round 75 million metric tons. This Is in a place to make it a prime-5 all-time crop and about 7% greater than the 5-yr common.

The timing Might not be greater as CP will acquire the final of the 5,900 new extreme-performance grain automobiles it ordepurple in 2018. These hoppers permit The typical grain practice to ship 15,000 tons of wheat, up from 10,400 when The agency used smaller hoppers and shorter practices. Furtherextra, in 2017, The agency serviced 12 8,500-foot succesful grain elevators. This yr, it could be 47. In 2024, that quantity is More probably to be 55.

Going forward, The agency will virtually certainly Be succesful of buy Kansas Metropolis Southern. This will decrease agriculture expoconstructive, yet grant the railroad entry to export amenities Wiskinny the South and Mexico.

That said, I furtherly proceed to guess on fertilizer shares. I reprimary bullish on CF Industries (CF), Mosaic (MOS), and their Canadian peer Nutrien (NTR).

Knowledge by YCharts

Fertilizer corporations in North America will proceed To revenue from favorable power worth completely differentials (primarily natural gas) as proven Wiskinny the slide under.

CF Industries

Listed right here are some notes from CF Industries:

• Global nitrogen current/demand stcapability To primarytain tight inTo twenty25 As a Outcome of of agriculture-led demand and forward power curves That time to persistently extreme power prices in Europe and Asia.
• The need to replenish worldwide grain shares, which has assisted extreme prices for corn, wheat, and canola, proceeds to drive worldwide nitrogen demand.
• Global nitrogen current availcapability reprimarys conspracticeed as extreme power prices in Europe and Asia set offed curtailments of ammonia manufacturing; an estimated 60% of European ammonia performance Did not opperiodte in Q3 2022.

Comparable feedagain have been made by Mosaic – which Is method much less Counting on natural gas worth completely differentials.

Still, Mosaic and fellow fertilizer producer Nutrien Ltd. see A strong market forward. Last week, Nutrien Chief Authorities Officer Ken Seitz wrestlened of looming shortages in coming yrs, with currents from Russia and Belarus conspracticeed. Nutrien plans to ramp up its performance 40% by 2025.

Mosaic’s peer Nutrien (NTR) expects that farmers will quickly buy extra aggressively.

Nutrien is seeing pay as you go gross sales of fertilizer — wright here farmers will buy forward to safe product — about 15% To twenty% greater than in 2020. Seitz is anticipating farmers who didn’t buy this yr and have used all their stopurple product To leap into the market and ship prices extreme as quickly as extra.

A extra conservative play is Archer-Daniels-Midland (ADM). This agency Is biggest Fitted to dividend (progress) buyers – Similar to Deere.

FINVIZ

The agency provides All Sorts of providers, which embrace procurement and storage of grains, manufacturing of oilseeds and bymerchandise, and assist providers like transportation, exports, advertising, and completely differents.

Archer-Daniels-Midland

The agency Does not importantly revenue from rising crop prices. What issues are crush margins and export demand for Services.

With regard to The agency’s outlook:

Wanting forward, tright here are a quantity of externalities that We’re monitoring going inTo twenty23. We anticipate ongoing resilient demand for our merchandise, A strong crush margin environment, a constructive outlook for starches and sweeteners, and a continuation of our progress trajectory in Vitamin. Tright here is furtherly vital uncertainty Wiskinny The worldwide financial system and geopolitical environment. We expect To primarytain our strong momentum into The primary quarter of 2023. And past that, We’re assupurple that our state of affairs planning and exereduceion will give us The power to effectively handle by way of a dynamic environment.

An identical inventory is Bunge Ltd. (BG), which has similar opperiodtions and A greater yield.

Then tright here’s ancompletely different agency I’ve appreciated For A very Very prolonged time. The Andersons (ANDE) is A critical participant in ethanol, grain commerce, and plant dietary vitamins. It is the againbone of the corn belt.

FINVIZ

The agency has the performance To current 475 million gallons of ethanol in 5 crops. The agency advantages from Quick entry to feedinventory (corn), developing ethanol demand As a Outcome of Of greater power demand and extreme oil prices, As properly as to its expoconstructive to fertilizers and commerce.

Energy Information Administration

Based on The agency:

[…] we anticipate A very strong and probably doc setting yr. Trade group end outcomes have been a doc third quarter on an adsimplyed basis and mirror enhancement In lots of spaces. Our Louisiana belongings carried out properly Through the corn harvest capturing strong elevation margins. Lead possession in our grain time periodinal belongings is incomes space income. In merchandizing, our new revenue facilities have contributed Higher than $5 million this quarter to our pretax incomess. We proceed to have very strong Leads to our western greenbelt in animal feed ingpurpleient merchandizing As properly as to in our meals and specialty ingpurpleients companies.

For constructive, please do Your private due diligence earlier than buying for any Of these fundings. We’ll furtherly proceed To debate most (if not all) Of these corporations in 2023 and past as new developments happen.

Takeamethod

On This textual content material, we talked about my agriculture outlook and Quite A pair of shares that Go together with that. I expect the agriculture bull market to final, Even when The velocity of change is slowing (crop and fertilizer prices have already accelperiodted a lot).

Neverthemuch less, That furtherly provides A lot of alternatives to Earn money as I do not think about that farm income or demand fundamentals will take Worthwhile in 2023 (A minimal of not An enall by way of hit).

We talked about machinery shares revenueing from a substitutement cycle, fertilizer corporations revenueing from extreme demand and favorable power worth completely differentials, commerce and merchandise corporations revenueing from extreme export demand and extreme margins, and infrastructure corporations Just like the CP railroad.

Let me know what You think about my outlook. Also, did I miss any shares? What are you buying for?